25 Must-Read Quotes from Warren Buffett's Letter to Shareholders

Alex Dumortier, CFA, The Motley Fool

Published 6:00 am, Saturday, March 8, 2014

Photo: Nati Harnik, AP

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Fruit of the Loom
Warren Buffett plays the ukelele at the Fruit of the Loom stand at the Qwest Center in Omaha, Neb., while touring exhibits prior to the annual Berkshire Hathaway shareholders meeting in April 2005. less

Fruit of the Loom
Warren Buffett plays the ukelele at the Fruit of the Loom stand at the Qwest Center in Omaha, Neb., while touring exhibits prior to the annual Berkshire Hathaway shareholders meeting in ... more

Geico
Geico in Amherst, N.Y. celebrated its 2,500th employee in June 2013. Warren Buffett, CEO of Berkshire Hathaway which owns Geico, came to mark the milestone and answer questions from the media.

Geico
Geico in Amherst, N.Y. celebrated its 2,500th employee in June 2013. Warren Buffett, CEO of Berkshire Hathaway which owns Geico, came to mark the milestone and answer questions from the media.

Photo: Sharon Cantillon, AP Photo/The Buffalo News

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#4 Warren Buffett at $58.2 B

Photo: Warren Buffett, Chairman and CEO of Berkshire Hathaway and Co-Chairman of Goldman Sachs 10,000 Small Businesses Program, speaks during a press conference where it was announced that Detroit was named the 11th city to be included in the $500 million Goldman Sachs initiative November 26, 2013 at Ford Field in Detroit, Michigan.
(Photo by Bill Pugliano/Getty Images) less

#4 Warren Buffett at $58.2 B

Photo: Warren Buffett, Chairman and CEO of Berkshire Hathaway and Co-Chairman of Goldman Sachs 10,000 Small Businesses Program, speaks during a press conference where it was ... more

Former supermodel and now businesswoman Kathy Ireland and Berkshire Hathaway Chairman and CEO Warren Buffett follow Ireland's golf putting prior to the Berkshire Hathaway shareholders meeting in Omaha, Neb., Saturday, May 4, 2013. At center top is Detroit Lions defensive tackle Ndamukong Suh. Tens of thousands attend Berkshire Hathaway shareholders meetings to hear Buffett and Charlie Munger answer questions. No other annual meeting can rival Berkshire's, which is known for its size, the straight talk Buffett and Munger offer and the sales records shareholders set while buying Berkshire products. (AP Photo/Nati Harnik) less

US billionaire investor Warren Buffett (L) and Microsoft founder Bill Gates (R) flip over their Dairy Queen Blizzard treats, the most successful product ever released in the history of Dairy Queen, a US desert chain with over 300 stores in China, at the opening of a new branch in Beijing on September 30, 2010. Gates and Buffett hosted a banquet the previous night for China's super rich that sparked debate about Chinese philanthropy, amid reports that wealthy invitees had been reluctant to attend. The two, who have already persuaded 40 wealthy US individuals to hand over more than half of their fortunes, had insisted they would not pressure attendees for money and simply wanted to learn about charity in China. Buffett is the CEO of Berkshire Hathaway which owns Dairy Queen. AFP PHOTO/Frederic J. BROWN less

US billionaire investor Warren Buffett (L) and Microsoft founder Bill Gates (R) flip over their Dairy Queen Blizzard treats, the most successful product ever released in the history of Dairy Queen, a US desert ... more

Photo: FREDERIC J. BROWN, Getty

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Microsoft founder and philanthropist Bill Gates (L) Wipro Chief Azim Premji (2L) Melinda Gates (2L) and Warren Buffett (R) take part in a joint press conference in New Delhi on March 24, 2011. Two of the world's richest men, Bill Gates and Warren Buffett, took their charity roadshow to New Delhi where they hope to coax their rich Indian peers to part with some of their wealth. AFP PHOTO/RAVEENDRAN less

Microsoft founder and philanthropist Bill Gates (L) Wipro Chief Azim Premji (2L) Melinda Gates (2L) and Warren Buffett (R) take part in a joint press conference in New Delhi on March 24, 2011. Two of the ... more

Photo: RAVEENDRAN, Getty

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Warren Buffett: Wilson High School, 1947

Warren Buffett: Wilson High School, 1947

Photo: Ancestry.com

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Warren Buffett, chief executive officer of Berkshire Hathaway Inc., left, meets with U.S. President Barack Obama in the Oval Office of the White House in Washington, D.C., U.S., on Wednesday, July 14, 2010.

Warren Buffett, chief executive officer of Berkshire Hathaway Inc., left, meets with U.S. President Barack Obama in the Oval Office of the White House in Washington, D.C., U.S., on Wednesday, July 14, 2010.

Warren Buffett, chairman and CEO of Berkshire Hathaway sings with University of Nebraska cheerleaders prior to the annual shareholders meeting in Omaha, Neb., Saturday, May 5, 2012. Berkshire Hathaway is ... more

FILE - In this May 1 2010 file photo, Berkshire Hathaway Chairman and CEO Warren Buffett plays and sings with the Quebe Sisters Band during the annual shareholders meeting, in Omaha, Neb. Buffett’s recent prostate cancer diagnosis reminds Berkshire Hathaway shareholders that someday the 81 year-old will no longer run the conglomerate he built. Most shareholders would rather not imagine life without the Oracle of Omaha at the company’s helm, especially when more than 30,000 of them are gathering in Omaha for this weekend’s annual meeting. less

FILE - In this May 1 2010 file photo, Berkshire Hathaway Chairman and CEO Warren Buffett plays and sings with the Quebe Sisters Band during the annual shareholders meeting, in Omaha, Neb. Buffett’s recent ... more

Photo: AP

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SUN VALLEY, ID - FILE: Warren Buffett (R) and Astrid Buffett attend the Allen & Company Sun Valley Conference on July 6, 2011 in Sun Valley, Idaho. It was reported on April 17, 2012 that in a letter to shareholders of Berkshire Hathaway, Warren Buffett announced that he has been diagnosed with prostate cancer. (Photo by Scott Olson/Getty Images) less

SUN VALLEY, ID - FILE: Warren Buffett (R) and Astrid Buffett attend the Allen & Company Sun Valley Conference on July 6, 2011 in Sun Valley, Idaho. It was reported on April 17, 2012 that in a letter to ... more

Photo: Scott Olson, Getty Images

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FILE - In this March 14, 2012 file photo, Warren Buffett and Astrid M. Buffett arrive at the Booksellers area of the White House in Washington for the State Dinner hosted by President Barack Obama and first lady Michelle Obama for British Prime Minister David Cameron and his wife Samantha. A bill designed to enact President Barack Obama's plan for a "Buffett rule" tax on the wealthy would rake in just $31 billion over the next 11 years, according to an estimate by Congress' official tax analysts obtained by The Associated Press. (AP Photo/Charles Dharapak, File) less

FILE - In this March 14, 2012 file photo, Warren Buffett and Astrid M. Buffett arrive at the Booksellers area of the White House in Washington for the State Dinner hosted by President Barack Obama and first ... more

Photo: Charles Dharapak

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Billionaire inverstor Warren Buffett chairman and CEO of Berkshire Hathaway, is interviewed by Becky Quick, co-host of CNBC's "Squawk Box," on the floor of the Omaha World-Herald's press room Monay Feb. 27, 2012, in Omaha Neb. Buffett said Monday that stocks remain relatively cheap compared to other investments as the economy continues to improve. He also said that the company he heads is prepared to replace him whenever the need arises. (AP Photo/The Omaha World-Herald, Jeff Beiermann) ALL TV OUT, MAGS OUT less

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., tours the trading floor at the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Sept. 30, 2011. U.S. stocks retreated, extending the biggest quarterly drop since 2008 for the Standard & Poor's 500 Index, after reports from China and Germany fueled concern the global economy is slowing. Photographer: Scott Eells/Bloomberg *** Local Caption *** Warren Buffett less

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., tours the trading floor at the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Sept. 30, 2011. U.S. stocks ... more

Photo: Scott Eells, Bloomberg

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Billionaire investor Warren Buffett attends the premiere of 'Wall Street: Money Never Sleeps' at the Ziegfeld Theatre on Monday, Sept. 20, 2010 in New York.

Billionaire investor Warren Buffett attends the premiere of 'Wall Street: Money Never Sleeps' at the Ziegfeld Theatre on Monday, Sept. 20, 2010 in New York.

Photo: Evan Agostini, AP

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International Dairy Queen, Inc. President and CEO John Gainor holds a 33-inch, red Dairy Queen(R) spoon for Warren Buffett to sign at the May 2010 Berkshire Hathaway shareholders meeting. The iconic red spoon is listed on eBay(R) to benefit Children's Miracle Network. (Photo: Business Wire) less

International Dairy Queen, Inc. President and CEO John Gainor holds a 33-inch, red Dairy Queen(R) spoon for Warren Buffett to sign at the May 2010 Berkshire Hathaway shareholders meeting. The iconic red spoon ... more

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San Francisco mayor gavin Newsom gets a hug from Bay Area billionaire financier Warren Buffett after the mayor introduced him Tuesday. Senator and presidential hopeful Hillary Clinton appeared with Buffett, at a public discussion in San Francisco Tuesday. Lance Iversen/San Francisco Chronicle (cq) SUBJECT 12/09/07,in SAN FRANCISCO Ca. less

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San Francisco mayor gavin Newsom gets a hug from Bay Area billionaire financier Warren Buffett after the mayor introduced him Tuesday. Senator and presidential hopeful Hillary Clinton ... more

Photo: Lance Iversen

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Senator and presidential hopeful Hillary Clinton held a public discussion with Bay Area billionaire financier Warren Buffett, at a $2,500-dollar sack luncheon in San Francisco Tuesday. Lance Iversen/San Francisco Chronicle (cq) SUBJECT 12/09/07,in SAN FRANCISCO Ca. MANDATORY CREDIT PHOTOG AND SAN FRANCISCO CHRONICLE/NO SALES MAGS OUT less

HILLARY1191451.JPG
Senator and presidential hopeful Hillary Clinton held a public discussion with Bay Area billionaire financier Warren Buffett, at a $2,500-dollar sack luncheon in San Francisco Tuesday. ... more

Warren Buffett released his annual letter to Berkshire Hathaway shareholders on Saturday. While Berkshire shareholders and anyone with a serious interest in investing might consider reading the whole thing, here are some highlights of Warren's wisdom.

On Berkshire's intrinsic value: "As I've long told you, Berkshire's intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That's why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount."

On Berkshire's performance in this cycle: "Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results."

On investment and operating performance: "Since 1970, our per-share investments have increased at a rate of 19.3% compounded annually, and our earnings figure has grown at a 20.6% clip. It is no coincidence that the price of Berkshire stock over the 43-year period has increased at a rate very similar to that of our two measures of value. Charlie [Munger] and I like to see gains in both sectors, but we will most strongly focus on building operating earnings."

On the Heinz deal: "Though the Heinz acquisition has some similarities to a 'private equity' transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen."

On Berkshire's elephant herd: "With Heinz, Berkshire now owns 8 1⁄2 companies that, were they stand-alone businesses, would be in the Fortune 500. Only 491 1⁄2 to go."

On Berkshire's "Powerhouse Five": "MidAmerican [Energy] is one of our "Powerhouse Five" -- a collection of large non-insurance businesses that, in aggregate, had a record $10.8 billion of pre-tax earnings in 2013, up $758 million from 2012. The other companies in this sainted group are BNSF [Railway], Iscar, Lubrizol and Marmon. Of the five, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire nine years ago."

On Berkshire's insurance operation: "Berkshire's extensive insurance operation again operated at an underwriting profit in 2013 -- that makes 11 years in a row -- and increased its float. During that 11-year stretch, our float -- money that doesn't belong to us but that we can invest for Berkshire's benefit -- has grown from $41 billion to $77 billion. Concurrently, our underwriting profit has aggregated $22 billion pre-tax, including $3 billion realized in 2013."

On investing in the U.S.: "Our subsidiaries spent a record $11 billion on plant and equipment during 2013, roughly twice our depreciation charge. About 89% of that money was spent in the United States. Though we invest abroad as well, the mother lode of opportunity resides in America."

On the U.S. as a long-term bet: "Charlie and I have always considered a 'bet' on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country's present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."

On being beaten by his portfolio managers: "In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd Combs and Ted Weschler handily did so. Each now runs a portfolio exceeding $7 billion. They've earned it. I must again confess that their investments outperformed mine. (Charlie says I should add 'by a lot.') If such humiliating comparisons continue, I'll have no choice but to cease talking about them."

On Todd Combs' and Ted Weschler's roles: "Todd and Ted have also created significant value for you in several matters unrelated to their portfolio activities. Their contributions are just beginning: Both men have Berkshire blood in their veins."

On Berkshire's "Big Four" stock investments: "Berkshire increased its ownership interest last year in each of its 'Big Four' investments -- American Express, Coca-Cola , IBM and Wells Fargo ... And, if you think tenths of a percent aren't important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire's share of their annual earnings by $50 million."

On growth opportunities in energy: "From a standing start nine years ago, MidAmerican now accounts for 7% of the country's wind generation capacity, with more on the way. Our share in solar -- most of which is still in construction – is even larger."

On GEICO's competitive advantage: "When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. That operational efficiency continues today and is an all-important asset. No one likes to buy auto insurance. But almost everyone likes to drive. The insurance needed is a major expenditure for most families. Savings matter to them -- and only a low-cost operation can deliver these. GEICO's cost advantage is the factor that has enabled the company to gobble up market share year after year. Its low costs create a moat -- an enduring one -- that competitors are unable to cross."

On Berkshire's "hidden" stake in Bank of America: "Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly."

On his $893 million investing error: "Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn't. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake. Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million. Next time I'll call Charlie."

On watching the playing field: "With my two small investments [Note: Buffett is referring to a farm and a New York commercial real estate property], I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays."

On ignoring market chatter: "Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

On speculation as a losing game: "If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

On investing in stocks as you would in a farm: "If 'investors' frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."

On the folly of panic selling: "During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?"

On a simple test for stock selection: "When Charlie and I buy stocks -- which we think of as small portions of businesses -- our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings -- which is usually the case -- we simply move on to other prospects."

On investing for the nonprofessional: "I have good news for these nonprofessionals: The typical investor doesn't need this skill. [Note: Buffett is referring to the ability to forecast a business' future earnings power.] In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners -- neither he nor his 'helpers' can do that -- but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."

On the simplest, best investment strategy for individual investors: "My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. ... My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers."

On avoiding market (mis)timing: "The 'when' [of investing] is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs' observation: "A bull market is like sex. It feels best just before it ends.") The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results."

On the best investment he ever made: I learned most of the thoughts in this investment discussion from Ben's [Graham's] book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase. ... For me, the key points were laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today. ... Of all the investments I ever made, buying Ben's book was the best (except for my purchase of two marriage licenses).

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Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Bank of America, Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, Coca-Cola, International Business Machines, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.